U.S. mortgage meltdown linked to 2005 bankruptcy law

There’s no shortage of blame for the mortgage crisis that drove the economy into the ditch.

But here’s a fresh culprit: the 2005 bankruptcy reform act, which was strongly pushed by the credit card industry.

So say three researchers at the Federal Reserve Bank of New York, who argue that the legislation shifted risk from credit card lenders to mortgage lenders, helping trigger the surge in home foreclosures.

Before Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, households could erase their unsecured debts by filing for Chapter 7 liquidation. That freed up income that distressed homeowners could use to make mortgage payments.

The new law, however, forced better-off households seeking bankruptcy protection to file under Chapter 13. That chapter requires homeowners to continue paying their unsecured lenders.

In other words, say the Fed researchers, cash-strapped homeowners who might have saved their homes by filing Chapter 7 are now much more likely to face foreclosure.